FEDERAL RESERVE press release

For Use at 4:30 p.m. December 23, 1983

The Federal Reserve Board and the Federal Open Market

Committee today released the attached record of policy actions

taken by the Federal Open Market Committee at its meeting on

November 14-15, 1983.

Such records for each meeting of the Committee are made

available a few days after the next regularly scheduled meeting

and are published in the Federal Reserve Bulletin and the Board's

Annual Report. The summary descriptions of economic and financial

conditions they contain are based solely on the information that

was available to the Committee at the time of the meeting.

Attachment

RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE

Meeting Held on November 14-15, 1983

1. Domestic policy directive

The information reviewed at this meeting suggested that real GNP was

growing at a relatively rapid rate in the current quarter, although the pace

of expansion appeared to have moderated from the annual rates of about 9-3/4

percent and nearly 8 percent reported by the Commerce Department for the second

and third quarters respectively. Renewed strength in personal consumption

expenditures and a substantial further increase in inventory accumulation

were expected to contribute to the continued expansion in economic activity.

Meanwhile, price and wage increases generally have remained moderate, although

there has been some pickup in recent months in average wage costs and in

nonfood consumer prices.

The index of industrial production, which had risen 1.3 percent in

both August and September, increased 0.8 percent further in October. Output

of business equipment rose sharply, while production of consumer durable goods

and construction supplies edged up slightly further, following very large

increases in the second and third quarters. By October the index had risen

about 14-3/4 percent from its trough in November 1982 to a level slightly

above the previous peak in July 1981.

Nonfarm payroll employment, adjusted for strike activity, rose

about 330,000 in October, about the same as the average monthly increase in

the preceding five months. Employment gains were particularly marked in

manufacturing and service industries, and employment in retail trade and

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construction also continued to strengthen. The civilian unemployment rate

fell 0.5 percentage point to 8.8 percent, two percentage points below its

peak in December 1982.

The nominal value of retail sales, after changing little on balance

during the summer months, rose about 1-1/4 percent in both September and

October. Outlays at apparel stores and furniture and appliance outlets rose

substantially in October, and sales at automotive outlets increased markedly

in both months. Sales of new domestic automobiles picked up to an average

annual rate of 7 million units in the two months, and sales of imported cars

surged in October, apparently in response to the increased availability of

popular Japanese models. Consumers remained optimistic about the near-term

outlook, according to recent surveys of consumer confidence. Moreover, recent

data indicated marked gains in consumers' real disposable incomes, reflecting

substantial increases in nominal personal income augmented by the midyear tax

cut and a continued moderate rate of increase in the average level of prices.

Following a surge in August, private housing starts fell to an annual

rate of 1.65 million units in September, close to their average in the second

quarter. Newly issued permits for residential construction also fell in

September, marking the second consecutive monthly decline. Sales of existing

homes remained at about the reduced July-August pace, while sales of new

homes rose after three months of decline.

Business spending for capital goods has remained strong. Outlays

for producers' durable equipment, which had increased at an annual rate of

about 20 percent in real terms in the second quarter, rose at a rate of nearly

16 percent in the third quarter. Recent data on new orders and shipments

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indicated further strength in the demand for business equipment. Investment

in nonresidential structures rose at an annual rate of about 12 percent in

the third quarter, after declines earlier in the year.

The producer price index for finished goods rose 0.3 percent in

October, about the same as in other recent months. Most of the October

increase was attributable to higher prices for consumer foods; prices of

energy-related items and of finished consumer goods other than foods were

little changed. Thus far in 1983 the index had increased at an annual rate

of less than 1 percent. The consumer price index rose 0.5 percent in

September, following advances of 0.4 percent in the preceding two months.

Consumer prices had changed little early in the year and over the first

nine months of 1983 had increased at an annual rate of about 3-3/4 percent.

The index of average hourly earnings rose somewhat more in September and

October than in previous months but the index has risen more slowly this

year than in 1982.

In foreign exchange markets the trade-weighted value of the dollar

against major foreign currencies had risen a little more than 1 percent since

early October. The eruption of political and military conflicts in a number

of locations around the world was a factor in the dollar's strength, as

some investors viewed the dollar as a "safe haven" during the period of

heightened international tensions. The rise was also associated in part

with some widening of the differential between U.S. and key foreign interest

rates. The U.S. foreign trade deficit increased considerably in the third

quarter as imports, especially of petroleum, rose faster than exports.

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At its meeting on October 4, 1983, the Committee had decided that

in the short run, open market operations should be directed toward maintaining

the slightly reduced reserve restraint that had been sought in the weeks just

prior to that meeting. This policy was expected to be associated with growth

of both M2 and M3 at an annual rate of around 8-1/2 percent for the period

from September to December. The members had agreed that the need for greater

or lesser restraint on reserve conditions should be evaluated against the

background of developments relating to the strength of the economic recovery,

the outlook for inflation, and conditions in domestic and international financial

markets. Depending on such developments, lesser restraint would be acceptable

in the event of a significant shortfall in the growth of the aggregates, while

somewhat greater restraint would be acceptable in the context of more rapid

growth in the aggregates. The Committee anticipated that M1 growth at an

annual rate of around 7 percent from September to December would be consistent

with its fourth-quarter objectives for the broader aggregates, and that ex

pansion in total nonfinancial debt would remain within the range of 8-1/2 to

11-1/2 percent established for the year. The intermeeting range for the

federal funds rate was retained at 6 to 10 percent.

In October, both M2 and M3 grew at annual rates close to the 8-1/2

percent pace sought by the Committee for the September-to-December period:

growth in M2, after slowing substantially over the summer months, accelerated

to an estimated annual rate of about 9 percent, while growth in M3 was at an

estimated annual rate of about 8-1/4 percent. On the other hand, expansion

in M1, at an annual rate of about 1-1/2 percent, remained low. Through

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October, M2 was at a level in the lower portion of the Committee's range for

1983 and M3 was in the upper portion of its range. M1 was in the lower

portion of the Committee's monitoring range for the second half of the year.

Growth in the debt of domestic nonfinancial sectors was estimated to

have slowed somewhat in October, but it remained well within the Committee's

monitoring range for the year. Growth in funds raised by private sectors

apparently moderated, while funds raised by the federal government continued

relatively large. Expansion in credit at U.S. commercial banks increased

at an estimated annual rate of about 10 percent in October, considerably

faster than in September and close to the average pace for the year to date.

The acceleration in October reflected primarily a substantial increase in

banks' acquisitions of U.S. Treasury securities but also strong growth in

consumer loans. Borrowing by businesses remained moderate, as funds generated

internally covered the bulk of financing needs; such borrowing continued to be

concentrated in the short-term area.

Total reserves contracted somewhat in October, but growth of non

borrowed reserves (including extended credit at the discount window) picked up.

Adjustment plus seasonal borrowing averaged $630 million during the five

statement weeks ending November 9, somewhat below the level that had prevailed

during most weeks in the previous intermeeting interval.

Interest rates generally fluctuated in a narrow range over the

intermeeting period. Federal funds traded mainly around 9-3/8 percent, down

from earlier weeks. Other short-term rates were up marginally on balance over

the intermeeting period. Most long-term rates rose somewhat, apparently in

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response to indications of continued strength in economic activity and to

uncertainties about the prospective pattern of Treasury financing as passage

of legislation to raise the debt ceiling was delayed. In contrast, average

rates on new commitments for fixed-rate conventional home mortgage loans

declined about 20 basis points and the ceiling rate on regular FHA/VA mortgage

loans was reduced 1/2 percentage point to 12-1/2 percent.

The staff projections presented at this meeting indicated that growth

in real GNP would slow from the rapid rate of recent quarters to a more moderate

pace during 1984. A key element in the expected slowdown was a projection of

lessened stimulus from inventory rebuilding and housing activity; growth in

consumer spending was also projected to slow somewhat. On the other hand,

business fixed investment was expected to accelerate and the foreign sector was

expected to be less of a damping factor over the course of 1984 than over

1983. A decline in the unemployment rate was anticipated over the projection

period, and upward pressures on prices were expected to remain generally

moderate.

In the Committee's discussion of the economic situation and outlook,

members commented that the economic expansion had remained stronger than

generally anticipated. Reports from around the country suggested increasingly

widespread optimism about business conditions and a high degree of consumer

confidence. While all the members expected the rate of economic growth to

moderate over the year ahead, there were some differences of view with regard

to the timing and likely extent of the slowdown. Some members anticipated

that the slowdown might be appreciably less than projected by the staff,

with unfavorable implications for inflationary pressures and the ultimate

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sustainability of the expansion. In support of this view, reference was made

to the favorable conditions for a surge in business fixed investment created

by the momentum of the expansion. In addition, it was pointed out that a

highly stimulative fiscal policy remained in prospect for 1984. Thus, while

the expansionary impact of housing and inventory accumulation could be

expected to wane during the second year of the recovery, vigorous growth

in fixed investment expenditures in conjunction with the prospective federal

deficit might well sustain relatively rapid expansion in overall economic

activity during the year ahead. It was also suggested that, at least for

the near term, consumer spending and inventory accumulation might provide

more stimulus to the economy than was generally anticipated.

Other members placed more emphasis on some elements of potential

weakness in the economic outlook. It was pointed out that there was as yet

no firm evidence that business fixed investment would prove to be exception

ally strong during 1984. Indeed, such investment might continue to be held

down by the persistence of weak demand for the output of some traditional

producers of capital equipment, and, more generally, by relatively high

interest rates in the context of massive Treasury debt financings. Inter

national developments might also continue to exert a retarding impact on

the domestic economy, especially if the dollar failed to depreciate as many

observers expected and if the economies of foreign countries remained rela

tively sluggish, thereby limiting export markets for U.S. products while

encouraging foreign firms to compete aggressively in U.S. markets. Reference

was also made to the possibility that problems related to the international

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debt situation could have adverse consequences for U.S. financial markets

and economic activity.

With regard to the prospects for prices, several members questioned

whether further progress could be made in containing inflationary pressures

if the rate of economic expansion did not slow to a more moderate pace over

the year ahead. One member observed that by late 1984, capacity utilization

rates could reach levels that would tend to generate inflationary cost pressures

even if unemployment were still high relative to earlier expansion periods. On

the other hand, some members felt that there was little current evidence that

price and wage pressures or inflationary expectations were worsening. One

member also noted that the economy was still operating well below capacity and

that further significant improvements in productivity, along with competitive

pressures from world markets, were likely to restrain inflation during 1984.

In the Committee's discussion of policy for the period immediately

ahead, all of the members found acceptable a policy directed toward maintaining

the existing degree of reserve restraint. In the view of some, however, an

argument could be made in favor of a small, precautionary step in the direction

of firming in light of the continuing strength of the economic expansion and

the associated danger of a resurgence of inflationary pressures during the year

ahead. While acknowledging the risks of inflation in a rapidly expanding economy

combined with large budget deficits and the relatively rapid monetary growth

earlier in the year, most members saw sufficient uncertainties in the outlook

to counsel against any change in reserve pressures at this time. Some members

were also concerned that under the prevailing circumstances even a modest

increase in restraint on reserves might have a disproportionate impact on

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domestic and international financial markets. The result could be an increase

in domestic interest rates large enough to have damaging consequences for

housing and other interest-sensitive sectors of the economy and to intensify

greatly the pressures on countries with severe external debt problems.

According to a staff analysis, a policy of maintaining the present

degree of restraint on reserve conditions was likely to be associated with

growth in M2 and M3 at rates that were consistent with the objectives that

the Committee had set previously for the fourth quarter and for the year as

a whole. Such a policy might also result in an acceleration in the growth of

M1 over the last two months of the year, primarily in response to increasing

needs for transaction balances in a rapidly expanding economy. Given the

limited growth of MI in October, however, its expansion for the entire fourth

quarter was likely to be below the growth rate of around 7 percent anticipated

earlier. The staff also indicated that the demand for transaction balances

remained subject to a great deal of uncertainty, and that transaction needs

related to strengthened business activity could continue to be met for a

time, at least in part, out of balances that had been built up earlier,

including NOW accounts.

One member indicated a preference for giving increased weight to M1

in the formulation of monetary policy and commented that its slow growth,

should it persist, could threaten the sustainability of the economic expansion.

Other members commented that the deceleration of M1 growth in recent months

had to be evaluated against the background of unusually rapid expansion in the

latter part of 1982 and the first half of 1983. It was also pointed out that

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the broader monetary aggregates emphasized by the Committee had been growing

in line with the Committes's objectives.

All the members indicated that they could support a directive that

called for maintaining the current degree of restraint on reserve positions

over the near term, but they also agreed that the directive should continue

to allow for some leeway to adjust the degree of reserve pressure during the

intermeeting period. In this connection, a number of members were in favor

of being particularly sensitive to evidence of continued unexpected strength

in the economy and the related potential for greater price and wage pressures,

should growth in the monetary aggregates appear to be exceeding expectations.

At the conclusion of the discussion the Committee decided that no change

should be made at this time in the degree of restraint on reserve positions.

The members anticipated that such a policy would continue to be associated with

growth of both M2 and M3 at an annual rate of around 8-1/2 percent for the period

from September to December. The members also agreed that the need for greater

or lesser restraint on reserve conditions should be evaluated against the

background of developments relating to the strength of the economic recovery,

the outlook for inflation, and conditions in domestic and international

financial markets. Depending upon such developments over the weeks ahead,

greater restraint would be acceptable in the event of more rapid growth in

the broader monetary aggregates, while lesser restraint would be acceptable

in the context of a significant shortfall in such growth. The Committee

anticipated that, given the relatively slow growth of M1 in October, its

expansion at an annual rate of around 5 to 6 percent from September to December

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would be consistent with the fourth-quarter objectives for the broader aggre

gates, and that expansion in total domestic nonfinancial debt would remain within

the range of 8-1/2 to 11-1/2 percent established for the year. It was agreed

that the intermeeting range for the federal funds rate, which provides a

mechanism for initiating consultation of the Committee, would remain at 6 to

10 percent.

At the conclusion of the discussion, the Committee issued the following

domestic policy directive to the Federal Reserve Bank of New York:

The information reviewed at this meeting suggests that real GNP is growing at a relatively rapid pace in the current quarter, although the rate of expansion appears to have moderated since the spring and summer. In October, industrial production increased appreciably, following large gains in previous months. Nonfarm payroll employment rose substantially further, and the civilian unemployment rate declined 1/2 percentage point to 8.8 percent. After changing little on balance during the summer months, retail sales strengthened in September and October. Housing starts and permits declined in September while home sales rose somewhat. Recent data on new orders and shipments indicate further strength in the demand for business equipment. Producer and consumer prices have continued to increase at about the same pace as in other recent months. The index of average hourly earnings rose somewhat more in September and October than in previous months, but over the first ten months of the year the index has risen more slowly than in 1982.

The foreign exchange value of the dollar has risen since early October against a trade-weighted average of major foreign currencies. The U.S. foreign trade deficit increased considerably in the third quarter, with imports, especially of petroleum, rising faster than exports.

After slowing substantially over the summer months, growth in M2 accelerated in October, while M3 continued to expand at a moderate rate. Through October, M2 was at a level in the lower portion of

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the Committee's range for 1983 and M3 in the upper portion of its range. M1 continued to grow at a sluggish pace in October and was in the lower portion of the Committee's monitoring range for the second half of the year. Longer-term market rates have risen somewhat on balance since early October, and short-term rates generally have fluctuated in a narrow range.

The Federal Open Market Committee seeks to foster monetary and financial conditions that will help to reduce inflation further, promote growth in output on a sustainable basis, and contribute to a sustainable pattern of international transactions. At its meeting in July the Committee reconsidered the growth ranges for monetary and credit aggregates established earlier for 1983 in furtherance of these objectives and set tentative ranges for 1984. The Committee recognized that the relationships between such ranges and ultimate economic goals have become less predictable; that the impact of new deposit accounts on growth of the monetary aggregates cannot be determined with a high degree of confidence; and that the availability of interest on large portions of transaction accounts may be reflected in some changes in the historical trends in velocity.

Against this background, the Committee at its July meeting reaffirmed the following growth ranges for the broader aggregates: for the period from February-March of 1983 to the fourth quarter of 1983, 7 to 10 percent at an annual rate for M2; and for the period from the fourth quarter of 1982 to the fourth quarter of 1983, 6-1/2 to 9-1/2 percent for M3. The Committee also agreed on tentative growth ranges for the period from the fourth quarter of 1983 to the fourth quarter of 1984 of 6-1/2 to 9-1/2 percent for M2 and 6 to 9 percent for M3. The Committee considered that growth of M1 in a range of 5 to 9 percent from the second quarter of 1983 to the fourth quarter of 1983, and in a range of 4 to 8 percent from the fourth quarter of 1983 to the fourth quarter of 1984, would be consistent with the ranges for the broader aggregates. The associated range for total domestic nonfinancial debt was reaffirmed at 8-1/2 to 11-1/2 percent for 1983 and tentatively set at 8 to 11 percent for 1984.

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In implementing monetary policy, the Committee agreed that substantial weight would continue to be placed on the behavior of the broader monetary aggregates. The behavior of M1 and total domestic nonfinancial debt will be monitored, with the degree of weight placed on M1 over time dependent on evidence that velocity characteristics are resuming more predictable patterns. The Committee understood that policy implementation would involve continuing appraisal of the relationships between the various measures of money and credit and nominal GNP, including evaluation of conditions in domestic credit and foreign exchange markets.

The Committee seeks in the short run to maintain the existing degree of reserve restraint. The action is expected to be associated with growth of M2 and M3 at annual rates of around 8-1/2 percent from September to December, consistent with the targets established for these aggregates for the year. Depending on evidence about the continuing strength of economic recovery and other factors bearing on the business and inflation outlook, somewhat greater restraint would be acceptable should the aggregates expand more rapidly; lesser restraint might be acceptable in the context of a significant shortfall in growth of the aggregates from current expectations. Given the relatively slow growth in October, the Committee anticipates that M1 growth at an annual rate of around 5 to 6 percent from September to December will be consistent with its fourth-quarter objectives for the broader aggregates, and that expansion in total domestic nonfinancial debt would remain within the range established for the year. The Chairman may call for Committee consultation if it appears to the Manager for Domestic Operations that pursuit of the monetary objectives and related reserve paths during the period before the next meeting is likely to be associated with a federal funds rate persistently outside a range of 6 to 10 percent.

Votes for this action: Messrs. Volcker, Solomon, Gramley, Guffey, Keehn, Martin, Morris, Partee, Rice, Roberts, Mrs. Teeters, and Mr. Wallich. Votes against this action: None.

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2. Authorization for Domestic Open Market Operations

At this meeting the Committee voted to increase from $4 billion

to $5 billion the limit on changes between Committee meetings in System

Account holdings of U.S. government and federal agency securities specified

in paragraph 1(a) of the authorization for domestic open market operations,

for the intermeeting period ending with the close of business on December 20,

1983.

Votes for this action: Messrs. Volcker, Solomon, Gramley, Guffey, Keehn, Martin, Morris, Partee, Rice, Roberts, Mrs. Teeters, and Mr. Wallich. Votes against this action: None.

This action was taken on the recommendation of the Manager for

Domestic Operations. The Manager had advised that projections for the

upcoming intermeeting period indicated a substantial need for additions

to reserves relating to a seasonal increase in currency in circulation.

Accordingly, the need for net purchases of U.S. government and federal

agency securities during the intermeeting interval was considered likely

to exceed the standard $4 billion limit on intermeeting changes in holdings

of such securities.

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